Universal and SoundCloud are in talks over a new way to pay artists for streaming – Music Business Worldwide

MBW Explains is a series of analytical features in which we explore the context behind major music industry talking points – and suggest what might happen next.

WHAT’S HAPPENED?

Universal Music Group (UMG), the world’s largest music rightsholder, has entered talks with music streaming service SoundCloud about changing the way artists are paid for streams.

That’s according to Bloomberg, which citing people familiar with the matter, reports that UMG and SoundCloud hope to conclude talks by the end of the year.

Bloomberg also reports that Bain & Co. has been drafted in by UMG to consult on the commercial outcomes of various possible changes to music’s streaming royalty model.

The talks with SoundCloud mark yet another front that UMG has opened in a growing campaign to improve on the payments that streaming services make to artists and music rightsholders.

Earlier this year, UMG struck up a partnership with another streaming service TIDAL to research new streaming models and specifically how music platforms can “generate greater commercial value for every type of artist” by “harnessing fan engagement.”

UMG struck up another partnership, this time with France-born streaming service Deezer, to “investigate potential new economic models for music streaming that more fully recognize the value artists create”.

If UMG seems in a hurry to reform the payment model used by streaming services, that may be due to just how important streaming has become to the music business.

According to IFPI’s latest Global Music Report, ad-supported and subscription-based accounted for 67% of recorded music revenues worldwide in 2022. In the US, the world’s largest music market, streaming accounted for 84% of recorded music revenues last year.

Creating a business model for streaming that works for music labels and artists, as well as DSPs, could be the single most significant element in determining the future direction of the music rights business.

WHAT’S THE CONTEXT?

Over the past decade, the meteoric rise of streaming services like Spotify and Apple Music rescued the record business from the doldrums of the early 2000s, when the decline of physical music sales and the rise of digital piracy threatened to upend the industry altogether.

But as the streaming industry has matured, recording companies have grown dissatisfied with how streaming services pay royalties. The pro-rata model favored by most DSPs essentially treats all streaming traffic equally. A DSP typically pools together the share of ad and subscription revenue it will pay out to artists, and then makes payments to artists based on each artist’s share of total streams.

That may sound fair at first glance, but as the music industry is currently discovering, the pro-rata model can be “gamed” in favor of small (and sometimes unscrupulous) actors who siphon off the potential earnings of legitimate artists.

The major music companies also face a threat from the vast supply of music hitting DSPs,.diluting their global market share: some 120,000 new tracks are now being uploaded to streaming services daily.

“There is a growing disconnect between, on the one hand, the devotion to those artists whom fans value and seek to support and, on the other, the way subscription fees are paid by the platforms.”

Sir Lucian Grainge, Universal Music Group

Sir Lucian Grainge, Chairman and CEO of UMG, laid out those concerns – and the need for a new payment model to deal with them – in a note to staff early this year, in which he called for a new ‘artist-centric” model of streaming payments.

“What’s become clear to us and to so many artists and songwriters—developing and established ones alike—is that the economic model for streaming needs to evolve… There is a growing disconnect between, on the one hand, the devotion to those artists whom fans value and seek to support and, on the other, the way subscription fees are paid by the platforms. Under the current model, the critical contributions of too many artists, as well as the engagement of too many fans, are undervalued.”

Grainge continued: “Platforms naturally exploit the music of those artists who have large and passionate fan bases. But then, once those fans have subscribed, consumers are often guided by algorithms to generic music that lacks a meaningful artistic context, is less expensive for the platform to license or, in some cases, has been commissioned directly by the platform.

“For example, just witness the thousands and thousands of 31-second track uploads of sound files whose sole purpose is to game the system and divert royalties. The result? A less fulfilling experience for the consumer, diminished compensation flowing to artists that are driving the business models of the platforms, and fewer cultural moments that fans can collectively share…”

“It can’t be that an Ed Sheeran stream is worth exactly the same as a stream of rain falling on the roof.”

Robert Kyncl, Warner Music Group

While Grainge has been perhaps the loudest voice calling for a change to how artists are compensated, he is by no means the only one. Some have presented other ideas for what an “artist-centric” model could look like.

At a tech and media conference in March, Warner Music Group’s recently-appointed CEO, Robert Kyncl, laid out what he referred to as a “multiplier” plan for streaming payments that would reward artists by giving them “multipliers” on their royalties if their presence on the platform provides additional value.

“For instance, if a subscriber comes to a DSP and starts [their listening] session with Lizzo, Lizzo should get multipliers on her views,” Kyncl said.

“Lizzo basically brought them to the platform… If she is consistently starting long sessions, even if it’s not all her content, but she’s a consistent long session generator, she should have a multiplier for that. If she is being searched for, she should get a multiplier for that.”

A few months later, on WMG’s earnings call, Kyncl summed up his sentiment succinctly: “It can’t be that an Ed Sheeran stream is worth exactly the same as a stream of rain falling on the roof.”

Kyncl argued the pro-rate model doesn’t seem “like something that’s aligned with the way the world works. For instance, in sports, LeBron James earns more money than some of his teammates – [and] not because he plays more hours per day. He plays exactly the same number of hours [as other players] yet he earns more.”

WHAT HAPPENS NEXT?

For the music industry to make progress on this issue, it has to develop a concrete “artist-centric” payment model for streaming, and to get music streaming services to agree to it.

That might be easier said than done, because some streaming services have been moving towards what some call a “user-centric” or “fan-powered” model of royalty payments.

SoundCloud itself was one of the pioneers of this approach, introducing it to 118,000 of its artists in 2021.

Under that model, instead of the pro-rata model that pools all the money for royalties together and pays out to artists according to share of total streams, the royalties generated by each individual subscription were split exclusively between the artists that the owner of that subscription played in a month.

In a study of the impact of that model, research firm Midia Research found that about 56% of artists ended up with higher streaming revenues than they had under the old model, while 44% saw their incomes shrink.

Perhaps equally importantly, the study found that the “fan-powered” model did indeed reduce illegitimate streaming activities, i.e., what Grainge called streams “whose sole purpose is to game the system and divert royalties.”

“We do think that price segmentation is going to benefit us, like it is going to benefit every single player.”

Denis Ladegaillerie, Believe

But the “fan-powered” model is significantly different from the “artist-centric” model that is being promoted by execs at major recording companies – and in fact, in his note to staff earlier this year, Grainge indicated that he didn’t support the “fan-powered” model.

Grainge wrote that “[To] correct [the streaming payout] imbalance, we need an updated model.” He added: “Not one that pits artists of one genre against artists of another or major label artists against indie or DIY artists. We need a model that supports all artists — DIY, indie and major.”

Under Kyncl’s “multiplier” plan, superstar artists like Drake or Lizzo, with the ability to bring in new subscribers, would be rewarded. But under the “fan-powered” model, those artists who have very loyal followings would be best compensated.

Kyncl’s “multiplier” plan isn’t the only idea out there for an alternative streaming business model. One idea that has been gaining ground involves building higher-tier subscription levels for super fans of certain artists. These higher-tier plans would send more revenue to artists than what they would see from regular subscribers or users of the ad-supported tier.

“One part of the discussion is how do we create price segmentation for superfans, to be able to better monetize superfans,” Denis Ladegaillerie, CEO of music label and distributor Believe, said during the company Q1 earnings call in April.

“Price segmentation is going to contribute to increased ARPU [average revenue per user],” Ladegaillerie continued. “We have more and more top artists. These artists have very engaged fans. We have a lot of entry-level artists. These entry-level artists, especially at the beginning of their career, even tend to have stronger fandom than top artists. We do think that price segmentation is going to benefit us, like it is going to benefit every single player.”

Ladegaillerie estimated that about 0.5% to 1.5% of a musical artist’s followers are “superfans” who are willing to buy merchandise or pay for concert tickets – or, potentially, to pay for a higher tier of music subscription service that gives them access to additional or early content, for example.

Though he didn’t have an estimate for how much money this “segmentation” of streaming subscribers could bring in, he did suggest that it would vary by artist.

And Ladegaillerie also indicated that the industry is about to undergo a period of experimentation, to see what works and what doesn’t when moving away from the pro-rata payment model.

“We expect some testing to be done around these topics by a few services in 2023 and then take the learnings and probably have more larger-scale deployment in 2024 or beyond,” he told analysts on the call.

A FINAL THOUGHT…

One thing that’s not likely to be lost in the news of Universal’s reported negotiations with SoundCloud – or any of the other talks and projects going on between recording companies and streaming services – is the actual amount those streaming services charge music listeners.

Changing business models – however you choose to change them – will end up being a zero-sum game if the total amount of money available to split between artists remains the same.

For every Lizzo that gains from a “multiplier” model there will be a smaller artist who loses income. For every popular indie artist who gains from a “fan-powered” model, there will be a large artist with a less-devoted fan base who loses out.

It may take price hikes to get the music industry to where it wants to be in terms of revenue. In the view of an increasing number of music business leaders, music is simply undervalued in the marketplace.

“The price value of music is extraordinary when compared to other media products, especially other streaming media products – video, for example,” Warner Music Group’s CFO, Eric Levin, said at a media and communications conference last month.

Levin noted  that music streaming saw no price increases over the decade that it came to dominate music consumption, and that price hikes are “long overdue.”

Some preliminary price hikes have happened, notably at Apple Music and YouTube Premium, and Levin said these hikes showed the streaming industry is ready for more – a comment almost certainly targeted at Spotify, which has maintained its $9.99/€9.99/£9.99 rate for monthly premium individual subscriptions in the US, UK and Europe’s biggest markets since it came on the scene a decade ago.

Levin said he hopes the recent price hikes have shown streaming services that their businesses can bear it, and that “they start to have confidence in the ways to do it successfully, that they continue to look at the price value of music relative to what consumers pay for other products and understand that there’s more room for increases.”

That certainly is the prevalent opinion among music industry insiders. Asked by an analyst in April to clarify whether he felt price hikes would be a more impactful way to generate increased revenue than further segmentation of the subscriber market, Believe’s Ladegallerie was unequivocal.

“Yes. Yes, absolutely,” he said.Music Business Worldwide